Critical Assessment of Instant Payments as a Solution for the German Market

Table of contents

Table of figures

List of tables

List of abbreviations

1. Introduction
1.1. Background
1.2. Field of attention: concept of "Instant Payments" in Europe
1.3. Objective and research questions of this work
1.4. Scope and structure of this work

2. Setting the Stage: The German payment market today
2.1. Characteristics and distinction of electronic payments
2.1.1. Evolution from physical exchange to electronic payment
2.1.2. Electronic versus cash payments
2.1.2.1, Advantages
2.1.2.2. Disadvantages
2.1.3. Common denominators of electronic payments instruments
2.1.3.1. Cash payment
2.1.3.2. Credit transfer
2.1.3.3. Direct debit
2.1.3.4. Scheme/based payment
2.1.4. Payment culture in Germany
2.2. Instant payments as a new method of electronic payments
2.2.1. What has been defined in the Euro-area to date?
2.2.1.1. SCTInst scheme
2.2.1.2. EBA CLEARING Blueprint
2.2.2. Non-EUR example: Faster Payments
2.3. The market for electronic payments in Germany
2.3.1. Market characteristics
2.3.1.1. Supplier Power
2.3.1.2. Buyer Power
2.3.1.3. Threat of Substitution
2.3.1.4. Threat of New Entry
2.3.2. External market influences
2.3.2.1. Political, legal and regulatory factors
2.3.2.2. Technological influences
2.3.2.1. Economical factors
2.3.2.2. Social factors
2.4. Change and innovation drivers
2.5. The concept of Instant Payments as innovation approach for Germany

3. Research approach
3.1. Research design
3.2. Research Methodology
3.3. Choice of sample and timing
3.4. Limitations

4. Results of the research
4.1. Consumer's and organisations': Results from a secondary source
4.2. What do the experts say? Results of the qualitative research
4.2.1. Overall considerations
4.2.2. Attitude towards Instant Payments
4.2.3. Definition of Instant Payments
4.2.4. Contributors to Instant Payments
4.2.5. Rationale for Instant Payments' attractiveness in Germany
4.2.5.1. Chances
4.2.5.2. Risks
4.2.6. External influences
4.2.7. Design proposal for the German market
4.2.8. Implementation roadmap

5. What does the research add in the defined framework?
5.1. Trends
5.2. Uncertainties in the expert group

6. Conclusion and recommendation

List of references VI

Annex 1 - Interview transcripts
Marco Samek - CEO Muume Group
Dirk Puzicha - Owner pay consult

Annex 2 - Expert questionnaire responses

Annex 3 - Data categorization primary research

Annex 4 - Issue tree „Why is IP attractive for Germany?"

Table of figures

Figure 1. Basic payment methods and business contexts

Figure 2. Cash payment process

Figure 3. Credit transfer process

Figure 4. Direct debit process

Figure 5. Scheme based payment process

Figure 6. SCTInst overview

Figure 7. Market segment considered

Figure 8. Number of banks in Germany

Figure 9. Buyer structure for PSP

Figure 10. Overview of market infrastructure for payment services

Figure 11. Secondary research result: Where Instant Payments needed in the past?

Figure 12. Secondary research result: Why where Instant Payments not needed in the past?

Figure 13. Secondary research result: How useful are Instant Payments?

Figure 14. Secondary research result: Whom would you trust as provider of Instant Payments?

Figure 15. Secondary research result: Who do you expect to be the provider of Instant Payments?

List of tables

Table 1: Market share of payment methods in Germany

Table 2: Delimitation of PSD, PSD2 and SEPA

Table 3: List of experts questioned and abbreviations used

Table 4: Categorization system for data analysis

List of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

1.1. Background

Trade is a concept that has been prevalent in social communities for centuries. Trade began with the exchange of one good for another good, which was perceived equally valuable (Judt, 2006, p. 22). The exchange of units of value in a trade is commonly referred to as "payment" (Nakajima, 2011, p. 1; Haldane, Millard, & Saporta, 2008, p. 2). Units of value were originally measured according to material value, either by the value of a particular good itself or by value holders, like metallic coins, but have changed over time (Heermann, 2003, p. 13). Meanwhile they have passed through different evolution steps that foster the separation of value from the material of the actual payment instrument (Lammer, 2006, p. 1). Money as such as well as its offsets like paper money or plastic payment cards have superseded the exchange of materially valuable payment instruments and stand for the dematerialization of payment means (Schimansky, Bunte, & Lwowski, 2011). Material values as well as money can be exchanged between two parties to conduct a payment, which is immediately effective and finalized after handing over the value units (Heermann, 2003, pp. 13-14).

The term "payment" describes the movement of payment methods between two parties and comprises any manifestation of payment methods like for example cash, deposit money and electronic money. Payment is the basis for almost any financial product nowadays (Riedl, 2002, p. 32). When the number of payments was much smaller, payment systems were operated using paper instructions. This highly manual payment processing was impractical for larger numbers of payments and therefore has been superseded by electronic payment systems. Electronic payment systems are based on information technology and are fundamental to digitally record and administer ownership of value (Nakajima, 2011, p. 4). Hence they require adequate information technology (IT) infrastructure, which usually operates as batch processing for a larger number of electronic payments^[1] collected over a specific timeframe (Leinonen, 2008a, p. 207). The obligation of the payer is usually discharged after the according batch has been processed overnight (Marquardt, 1994a, pp. 123-124). A payment system in general is defined as "a set of instruments, procedures and rules for the transfer of funds among system participants" (Bank for International Settlements, 2001, p. 14). Accordingly the term payment system refers to processes and infrastructures that are in place to facilitate payment flows in an economy (Frank, 2002, p. 19). Electronic payment systems are designed to process large numbers of small value payments^[2] and today considered basic and pivotal infrastructure in each economy (Wahlers, 2013, p. 3; Nakajima, 2011, p. 2; Fry, et al., 2005, p. 11).

Economies likewise experienced diversification as financial products and services became more complex (Summers, 1994, p. 2). While previously the physical possession, storage and transport of value units were crucial in order to assume and ensure ownership of value, the dematerialization of payment means and globalization of economies evolved to digitalization of payments that are processed in electronic payment systems (Wahlers, 2013, p. 3). The financial economy can on high level be divided in the money market and payment industry, which are nevertheless closely interwoven (Summers, 1994, p. 1). The money market is defined as economic infrastructure where funds can be purchased, exchanged and deposited (Walmsley, 2000, p. 2). The payment infrastructure is indispensable to serve the money market in all economies whereas the money market is indispensable for payment systems, in order to ensure framing monetary policy that provides liquidity to payment providers (Schmitz, 2006, p. 96). Differentiation can be made between central bank payment systems and private or retail payments systems, which will be further detailed later in this work (Nakajima, 2011, p. 12; Manning, Nier, & Schanz, 2009, pp. 31-32). The interlocking of the money market and payment can be applied for large value payments as well as retail payments (Welteke, 2002, p. 5). Today payment systems in developed payment markets like Germany are generally operated electronically^[3] (van den Bergh, 1994, p. 30).

Along with the development of electronic payment systems came a timely offset between the fulfilment of the trade and the completion of the value transfer (Haldane, Millard, & Saporta, 2008, p. 4). Payment systems always operate the sequence of the initiation of a payment, the processing of the respective payment and the finalization of the payment (Riedl, 2002, pp. 11-13; SRC, 2016, p. 15; Dippel, Lohmann, & Peschke, 2008, p. 20). Even in dematerialized payments by e.g. paper money, the process can be finalized immediately by handing over the value carrier in exchange for the goods or services and the recipient can immediately reuse the value (Wagener, 2012, pp. 15/16; de Haan, Oosterloo, & Schoenmaker, 2012, p. 196). In contrast the finalization of an electronic payment is only completed once the discharging of an obligation is recorded in a payment system and therefore subject to a timely offset (Fry, et al., 2005, p. 6). Only after recording the value exchange in a payment system - the settlement of the payment - the recipient can reuse the value (Nakajima, 2011, p. 1). The recipient of an electronic payment in Germany, the payee, can therefore often only dispose of the transferred funds with a delay of one day (European Payments Council, 2016).

Broadening the view from the financial economy to other industries, it can be observed that digitalization is proceeding and speeding up in all industries with new business models evolving in various areas. While the general trends are to increase speed of processes, digitalize businesses and expand the global reach, the related change is proceeding at different speed in different industries (Skinner, 2015, pp. 20-21). Instant messaging is a matter of course for consumers in telecommunication today and even retailers are nowadays able to offer immediate services like same day delivery (Vogelsang, 2010, p. 13; Lehmann, 2016, p. 15, 50-51; Bott & Milkau, 2016, p. 9). In contrast, most payment services are still subject to a timely delay. Observers assume that the convenience and speed of interaction consumers' experience, for example when shopping online with their smartphones independent from opening hours or exchanging messages, photos or videos in real-time, will be expected for other areas as well (Lehmann, 2016, p. 43; Bott & Milkau, 2016, p. 9). The financial industry is therefore forced to adapt their speed to the digitalized society and innovate the way electronic payments work today (Leinonen, 2008b, p. 141).

1.2. Field of attention: concept of "Instant Payments" in Europe

Regulators recognize digitalization and increased economic speed and derive the necessity of a new payment instrument that accelerates payments. This is assumed to address the consumers' behavioural change due to instant messaging, which substantiates a new consumer demand for instant payment execution (European Payments Council, 2016). Subsequently, a new electronic payment instrument was conceived by the European Central Bank (ECB) and further refined by two industry stakeholder associations. This concept for a new payment system is commonly referred to as "Instant Payments" and shall be the field of attention for this thesis (Korschinowski, Zylka, & Schwittay, 2015). Yet only few proposals for an Instant Payments solution have been defined, conceptualized and published on European level and will be further detailed in chapter 2.2.1. An Instant Payments solution - meaning a full process-chain including measures and infrastructures that allow processing of payments in real-time from the originator to the beneficiary for live payments - has neither been finally designed for specific countries in the Euro-area, nor implemented in any European country based on a Pan-European standard (European Central Bank, 2016b). Furthermore, it has not been applied and assessed for specific European markets yet, hence an assessment of the concepts attractiveness for the German payment market is lacking. It has neither been assessed whether feasible alternatives to the mentioned proposals exist or whether the proposed concept is the best option for each individual European payment market.

1.3. Objective and research questions of this work

This work has two main objectives in regards to the European concept of Instant Payments as in discussion today. The first aim of this work is to examine the factual basis for the ECB's rationale by analysing the German payment market ultimately aiming at a conclusion on the attractiveness of an Instant Payments solution for the German payment market. The research question of why Instant Payments are an attractive solution for the German market shall be answered in the course of this work.

Subsequent and referring to this market examination, the second objective is to identify a suitable design and a possible implementation approach for an Instant Payments solution in Germany. The second research question of how an Instant Payment solution for the German market should be designed and implemented will be addressed consecutively. This examination will consider the two proposals mentioned, but not be limited to this. Potential alternatives will likewise be observed.

1.4. Scope and structure of this work

This thesis focuses on the geographical region of Germany for the investigation. Non- German references will be made for clarification purposes, where relevant. The scope will furthermore be limited to electronic retail payments, which are the area of application for the concept of Instant Payments as of today; large value payments are not observed in detail. The stated research questions will be addressed consecutively.

To provide a clear framework in the complex area of payment transaction, chapter 2 gives an overview of the literature and discourse on the German payment market today. In chapter 2.1 payments in general will firstly be classified and differentiated in the concept of value exchange. Subsequently, the class of electronic payments, to which the class of Instant Payments is a subset will be further analysed and categorized. In chapter 2.2 the current proposal for Instant Payments will be presented in more detail. In chapter 2.3 an analysis of the German market for electronic payments will be conducted under reference to academic and public discourse. A systematic approach is applied to analyse the market characteristics holistically. In chapter 2.4 innovation drivers in the payment industry will be outlined. Chapter 2 will conclude by presenting the gap in the literature currently available leading to the research questions previously stated. Consequently, in chapter 3, the research design and methods that were chosen to close the identified gap will be presented and justified. Chapter 4 will present the results of the research conducted whilst in chapter 5 these results will be analysed referring to the literature and discourse previously presented as well as management practice. This will allow a final conclusion in chapter 6.

2. Setting the Stage: The German payment market today

2.1. Characteristics and distinction of electronic payments

This chapter will give a brief outline of the basic concept of payments as value transfer by first elaborating on the historical background and development of money in general in order to drill down to electronic payments in particular. Subsequently, electronic payments will be compared with other means of payment. The three basic forms of electronic payments that have become prevalent until today will be described as a basis for the later discussion.

2.1.1. Evolution from physical exchange to electronic payment

As stated, in the introduction value exchange has been a basic concept of human communal life and society for centuries and evolved as the key criterion for economies globally. In this turn, economies have developed from exchange of goods to the creation of independent units of value, the money (Lammer, 2006, p. 1). These units of value have originally been attached to the actual value of their physical representation, mostly in form of coins or other units of valuable material, but been more and more detached from their tangible character (Wahlers, 2013, p. 4; Manning, Nier, & Schanz, 2009, p. 21). According to Simmel's philosophical analysis of money, this detaching manifests the definition of money as a separate dimension besides the value that is exchanged. This leads to the assumption that money is a separate measure of value that per se defines the relation of the things exchanged. (Simmel, 1930, pp. 160/161; Toussaint, 2009, p. 1) The existence of physical money constitutes whole business sectors and it holds its important role on the dimension of value exchange enablers, but never ceased evolving (Killing, 2003, p. 2). This significance of money as a separate dimension and the evolution of money to complex payment instruments is the rationale for the foundation of industries around this dimension (Bott & Milkau, 2016, p. 3). Together with the dematerialization of money, which is separating the value from its carrier, the existence of deposit money is manifested (Unruh, 2004, p. 15). Any representation of money serves the conservation of purchasing power and is thereby clearly advantageous in comparison to keeping goods (Hartmann, 2002, p. 389; Toussaint, 2009, p. 1). Usage of money furthermore serves the spatiotemporal decoupling of an exchange (Frank, 2002, p. 22).

The mentioned dematerialization of money as payment instrument and relative measure for value exchange can be considered the root cause for the formation of electronic payment methods as known and used today (Schimansky, Bunte, & Lwowski, 2011; Wahlers, 2013, p. 4). Despite both physical payments in form of cash and electronic payment methods co/exist until today, a tendency towards "electronization" of a significant number of retail payments can be observed (Killing, 2003, p. 2; Arango, Bouhdaoui, Bounie, Eschelbach, & Hernandez, 2014, p. 1; Bartzsch & Seitz, 2016, p. 124). Electronization of payment systems applies for both types of electronic payment systems. This means for large/value payment systems that are used for large value payments in the money markets, e.g. for foreign exchange or government bond trades, as well as retail payment systems that are used for smaller payments and are accessible for consumers and businesses (Nakajima, 2011, p. 14; Riedl, 2002, p. 21). Core element of electronic payment systems is the current account, where deposit money is kept. The current account is the central element to digitally record value changes for each participant in the payment system and usually kept at a financial institution, mostly at banks (Frank, 2002, p. 23; Dimitriadis, 2014, p. 8).

Variations of money, like paper money, checks and plastic card are well/established payment instruments and likewise find expression in electronic retail payment systems. Their physical exchange is often dispensable in favour of pure digital recording of a change in value ownership on current accounts in an electronic payment system (Evans & Schmalensee, 2005, pp. 21; 27). These recordings are based on orders that are processed in specific technical transaction message formats through the interbank networks and directly applied to the respective current accounts (Marquardt, 1994b, p. 41; Nakajima, 2011, p. 6; O'Mahoney, Peirce, & Tewari, 2001, pp. 9/11).

Payment instruments have different attributes that directly and indirectly affect their usage. In the following, electronic payments are defined and their advantages and disadvantages are outlined in comparison to cash payments as a physical payment instrument.

2.1.2. Electronic versus cash payments

Cash payments are payments where physical money is exchanged between at least two parties. Electronic payments are payments where data is exchanged in order to change values in virtual records and thereby exchange deposit money (Huch, 2013, p. 1). The central element of electronic payments in Germany is a current account, where deposit money is administered (Frank, 2002, p. 23).

2.1.2.1. Advantages

The major advantage of electronic money over physical value units is that it reduces cost for all parties that handle this form of value (Kruger & Seitz, 2014, pp. 12/13; Schmitz, 2006, p. 108). Physical value units need to be produced, sourced, and once the money is materially used up be finally removed or replaced by the authorized issuer, which are the central banks (O'Mahoney, Peirce, & Tewari, 2001, p. 7). In the daily handling of physical money in businesses it needs to be generally provided, transported, counted and stored. All of these steps in the lifecycle of physical value units are either limited to authorized specialists, require the handler to make certain considerations or even involve specialized parties to take over the respective step (Wahlers, 2013, p. 4; Kruger & Seitz, 2014, p. 101). Especially the everyday interactions with cash money cause significant ongoing costs for businesses. By using electronic money many of these steps are obsolete, e.g. the counting of value units is not required as the payment amount is explicitly stated in each transaction message (O'Mahoney, Peirce, & Tewari, 2001, pp. 7, 10). Although the stipulation for electronic payment processing has originally been the reduction of cost and risks that are associated with cash handling, most businesses embrace electronic payment processing and the according services are available and cost reductions applicable for both short/ and long/ distance transactions (Ehrhardt, 2002, p. 83). Nevertheless, new requirements arise for electronic payments, especially adequate technical infrastructure needs to be in place to ensure security and integrity of electronic payment systems^[4] (Fry, et al., 2005, p. 83). Despite the comparatively complex IT infrastructure requirements, this way of processing payments causes significantly lower overall cost in comparison to cash. (Killing, 2003, p. 2; Kruger & Seitz, 2014, pp. 53/54)

The electronic processing of payments hence reduced transaction costs and additionally made quicker value transfers possible in long/distance transactions. Payments with physical value units are concluded once the value carrier is physically handed over (de Haan, Oosterloo, & Schoenmaker, 2012, p. 196). Electronic payments release the payment from spatiotemporal requirements therefore payer and recipient do not have to be at the same location for the payment (Frank, 2002, p. 22). Thereby, electronic payments allow for new combinations of liquidity and interest. In payments with physical value carriers, liquidity is immediately exchanged and interest may only apply when the value is exchanged for example for lending purposes. Liquidity exchange from electronic payments is always delayed over different timeframes depending on the payment method. This makes application of interest possible and relevant and has been the cornerstone for numerous financial products. (Bauer, 2002, p. 142)

Additionally, electronic payment systems are structured records of financial data (Kruger & Seitz, 2014, p. 18). Despite these data being only limitedly accessible, the existence of information in databases allows authorized parties like payment service providers the reusing and analysing of the respective data in a very comfortable way (Riedl, 2002, p. 330). This data can, on the one hand, simplify mandatory reconciliation and reporting processes, e.g. for tax purposes, and can on the other hand allow for new value added services around the pure payment processing (Fry, et al., 2005, p. 6).

2.1.2.2. Disadvantages

The major disadvantage of electronic payments towards cash payment is the risk associated with the decoupling of time and place of a payment. Payment is always associated with different kinds of risks, like legal, operational, security and economic risks. Economically the settlement risk is the disadvantage compared to cash that shall be pointed out. Settlement risks result from the possibility that the settlement may not take place as expected and the funds are not transferred to the beneficiary. (Nakajima, 2011, p. 17; Fry, et al., 2005, pp. 4/5)

Additionally, the acceptance of electronic payments is limited in the market in comparison to cash. Cash is a statutory means of payment and can therefore be used for any sort of payment. In contrast, electronic payments are not mandatory for merchants to accept by law, and therefore not accepted everywhere in the market (Toussaint, 2009, pp. 2/3).

The argument that was previously stated for electronic payments in distance transactions, applies for cash payments in the face/to/face transaction: Cash payments are quicker as they are immediately effective (Ernst & Augustin, 2012, p. 257). By handing over banknotes or coins the payment is directly affecting the liquidity of the involved parties, where the liquidity of the originator reduces by the payment amount and the liquidity of the beneficiary increases accordingly. This characteristic is associated with the effect of discharging the debt immediately and is lacking in electronic payments, which require electronic data processing and are therefore usually only finalized with a timely offset. (Frank, 2002, p. 22) Payees that have a strong interest in ensuring continuous liquidity of their businesses, hence, have to implement solutions that help them bridge the liquidity gap in electronic payments (Muller, 2013, p. 171)

The data processing required for electronic payments implies that every electronic payment leaves a trace in an electronic payment system (Ernst & Augustin, 2012, p. 257). This traceability is in contrast to the anonymity that cash usage entails, and perceived as disadvantageous for consumers in certain payment situations. (Bauer, 2002, p. 146; Kruger & Seitz, 2014, p. 20) Furthermore, some typical use cases of cash money can only insufficiently be addressed by electronic payment methods. For example when money is given to someone as a gift, the physical value carrier can only limitedly be replaced by e.g. a prepaid card (Maurer, 2015, p. 81).

2.1.3. Common denominators of electronic payments instruments

As previously stated the existence of money, as a unit of abstract value constitutes significant industries and business areas in today's economies (Wahlers, 2013, p. 4). The number of industry participants and payment related functionalities they support is vast and will be considered later in this work. However, payment in general is an element of almost every financial service and all electronic payment services can be reduced to three basic methods that are behind all variations of payment methods in the German payment market (Frank, 2002, pp. 28-29; Riedl, 2002, p. 32; Judt, 2006, pp. 23-24; de Haan, Oosterloo, & Schoenmaker, 2012, p. 198).

For simplification reasons at this point it will be assumed that each electronic payment involves an Originator and a Beneficiary. Both parties make use of payment industry participants like banks in order to process the electronic payment. Although these processing chain may involve other participants that do not necessarily need to be licensed banks, they perform bank-like services and have connections to licensed banks. Hence, in the below description, they will likewise be referred to as Originator bank and Beneficiary bank. The point of payment initiation is an important differentiation criterion for electronic payments. Whilst the term "push-payments" describes payments that are initiated by the Originator, the term "pull-payments" describes the opposite process, where the Beneficiary initiates the payment on authorization of the Originator. (Findeisen, 2013, p. 80^[5] ; de Haan, Oosterloo, & Schoenmaker, 2012, p. 197)

On this simplified level this chapter will provide an illustrative overview of the three electronic retail payment methods that form the basis for the majority of payment instruments in Europe and also in Germany today (European Commission, 2007, p. 3)^[6]. Cash payment will be illustrated for completeness and explanatory purposes as well. For the electronic payment methods, it shall not be relevant in which paymentchannel the payment is initiated, as the basic methods apply for the channels point of sale (POS), where the originator and beneficiary are present at the location where the payment initiation takes places and the e/commerce, mail/order, telephone/order or mobile channels, where the originator and beneficiary interact over a geographical distance via technical communication like the Internet^[7]. Furthermore for it is irrelevant in this observation, whether the originator and beneficiary are businesses or consumers^[8]. Figure 1 illustrates the complexity of payment methods and their applicability in different business contexts as three-dimensional cube and highlights where some of the payment methods are not available in some combinations. This illustration follows the perception of the payment market as dynamic and differentiated, in contrast to outdated assumptions the payment market was static (Bott & Milkau, 2016, p. 2). Electronic payment methods that are further detailed below are shown in blue, the cash dimension is illustrated in orange. Faded sub-cubes are not prevalent in the German market. Despite literature and practice is available on diversification in all dimensions this overview shall form the basis for further references to the retail payment market in this work.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1. Basic payment methods and business contexts (own illustration)

In the following chapters it will be outlined how the payment methods technically work and what their legal implications are. Many publications also refer to cheques as a basic payment method. However, this work will not consider this payment instrument, as it is generally less relevant for German payers and its usage is significantly decreasing in the German market (Deutsche Bundesbank, 2015b, p. 7)(see chapter 2.1.4 for more information).

2.1.3.1. Cash payment

The payment with cash is conducted by handing over the respective value carrier, which is represented as coins or paper money bills from the originator to the beneficiary. This act finalizes the payment and is presented to emphasize the time difference associated with electronic payment methods that are observed below. Both parties may involve their respective bank in order to receive the cash or to deposit the cash's value to their current account. However, the bank is irrelevant for the payment, as cash may be likewise received from or reused in the market. Figure 2 illustrates a cash payment.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2. Cash payment process (own illustration)

2.1.3.2. Credit transfer

The credit transfer is often considered the classical instrument of bank/based, cashless payments (Killing, 2003, p. 88). It follows the principle of push-payments and can be initiated by the originator using different order channels to have a credit transfer order processed by the bank (Dimitriadis, 2014, p. 9). The originator may place the credit transfer order for a one­time or recurring payment either by paper form or electronically, for example using the bank's online banking platform. The bank will ultimately transfer both order types to electronic format. (Riedl, 2002, pp. 35-36).

Once received by the originator bank, the credit transfer order will be checked and processed if successfully validated. Validation includes for example the check for formal correctness of the order and availability of the necessary funds on the originator current account (Riedl, 2002, p. 36). Depending on which bank holds the originator and beneficiary current account, the credit transfer will either be processed bank/internally (both current accounts held at the same bank) or processed via an external clearing and settlement mechanism (CSM) to forward the transfer to another bank (Dimitriadis, 2014, p. 11). Processing means in legal terms a transfer of deposit money from one current account to another (Unruh, 2004, p. 23). The number of intermediaries in transferring the credit transfer order to the beneficiary bank can vary depending on the constellation of originator and beneficiary (Killing, 2003, p. 88). The amount pre/set in the credit transfer order will be credited to the beneficiary bank by the originator bank, to settle the payment the amount will then be debited to the originator by the originator bank and credited to the beneficiary by the beneficiary bank. In Germany, the banks are obliged to process the credit transfer for the beneficiary based on the agreement on account management^[9] (Wahlers, 2013, pp. 19/20). Credit transfers in euro in Germany follow the rules of the SEPA Credit Transfer scheme (SCT), which has been implemented on Pan/European level since its launch in January 2008 (Nakajima, 2011, p. 154; Abele, Berger, & Schafer, 2007, pp. 26/27). Under SCT funds are usually available to the beneficiary one bank working day after payment initiation (European Commission, 2007, p.7)^[10]. Figure 3 illustrates the described process of a credit transfer.

Abbildung in dieser Leseprobe nicht enthalten

Figure 3. Credit transfer process (own illustration)

2.1.3.3. Direct debit

Direct debit is a classical pull-payment, where the beneficiary initiates the payment on authorization of the originator (Riedl, 2002, pp. 36/37). In order to accept German direct debit payments in general, the beneficiary needs to have closed a collection agreement with the beneficiary bank (Killing, 2003, p. 91). This is the reason why direct debit processing is mainly limited to businesses; consumers are usually not directly placing direct debit orders (Lichter & Egner, 2012, p. 72). For banks this is advantageous, as all direct debit orders are placed electronically and no cost intensive paper handling is required for the primary processing (Riedl, 2002, p. 37). To process a direct debit payment, the originator must have issued a mandate to the beneficiary that allows collection of the transaction amount from the originator current account^[11] (Findeisen, 2013, p. 83; Dimitriadis, 2014, p. 13)^[12]. At the time of the direct debit the beneficiary sends the direct debit order to the beneficiary bank, which is acting as collecting agency and either processes the direct debit bank-internally or transfers it through a CSM to the originator bank to be processed. Hence, the amount is subsequently debited to the originator's current account and credited to the beneficiary's current account (Nakajima, 2011, p. 155; Findeisen, 2013, p. 84)^[13]. Whilst the initiator role can be considered advantageous for the beneficiary in comparison to credit transfer in regards to the timing of payment initiation, the main disadvantage for the beneficiary is that no availability check of funds can be performed hence a chargeback risk remains (Killing, 2003, p. 91). Like SCT, direct debit has been standardized under SEPA by launching the SEPA direct debit scheme (SDD) in November 2009 (Nakajima, 2011, p. 156; Stahl, Wittmann, Krabichler, & Breitschaft, 2012, p. 4_12; Abele, Berger, & Schafer, 2007, p. 27). Under SDD funds are usually available to the beneficiary one bank working day after payment initiation, given the respective amount is available on the originator current account. However, in contrast to a credit transfer, the time may extend due to the originator not necessarily having a direct contractual relationship with the executor of the payment, the beneficiary bank, which makes routing via intermediaries necessary (European Commission, 2007, pp. 7-8)^[14]. Figure 4 illustrates the described direct debit process.

Abbildung in dieser Leseprobe nicht enthalten

Figure 4.Direct process(own illustration)

2.1.3.4. Scheme-based payment

A payment scheme is defined as an eco-system with its own "functions, procedures, arrangements, rules and devices that enable a holder of a [scheme payment instrument] to effect a payment and/ or cash withdrawal transaction with a third party other than the [scheme payment instrument] issuer” (European Central Bank, 2008, p. 6). Despite the previously described payment methods have been standardized under SEPA rules that meet this scheme definition hereinafter the term scheme shall be used for schemes that are not directly effective on the current account, but employ a payment instrument, like a payment card. A scheme-based payment however usually combines elements of the credit transfer as well as the direct debit payment system. Next to this it establishes separate CSMs and is of significant importance especially in retail payments at the point-of-sale (POS) (EHI Retail Institut, 2016, p. 18). Hence it has gained the status of a payments system itself (European Commission, 2007, p. 3)^[15]. Scheme-based payments require the originator and the beneficiary to participate in the scheme, which mostly requires a separate contract in addition to the agreement for account management (European Commission, 2007, p. 4)^[16]. In Germany, the most common payment scheme "electronic cash” can be considered an exception from this rule, as it is operated by the banking industry and therefore directly attached to the user's current account. The scheme is accessible with the payment card that also works as customer card to the current account (Bundesverband deutscher Banken, 2009).

It can be differentiated between three- and four-party payment schemes (Dietrich, 2012, p. 160). The first party is the payer holding a scheme-specific payment instrument and contributing to the scheme by using this payment instrument at a payee, which is the second party and contributing to the scheme by accepting the respective payment instrument. The payer has an agreement with a scheme member that issues the payment instrument (issuer), whilst the payee has an agreement with a member that acquires the payment instrument (acquirer). In three-party schemes the role of issuer and acquirer is combined in one entity holding the relationship with both the payers and the payees within the scheme eco-system (Evans & Schmalensee, 2005, pp. 10-12).

In a scheme payment, the originator uses the payment instrument that was issued by the issuing originator bank at a beneficiary who was enabled by an acquiring beneficiary bank to accept the respective scheme. The payment request will be processed by the beneficiary bank and routed to the scheme's CSM for authorization. The scheme's CSM will either authorize the payment directly or pass on the request to the originator bank for authorization. An authorization response is sent to the beneficiary that indicates whether the payment was accepted. In order to clear and settle authorized scheme payments, clearing messages will be sent to the scheme's CSM in the message format defined by the scheme. Debiting of the originator by the issuing originator bank and crediting of the beneficiary by the acquiring beneficiary bank via the schemes CSM and within the scheme settlement rules completes the settlement process. (Stroborn, Heitmann, & Frank, 2002, pp. 38-39; Abele, Berger, & Schafer, 2007, pp. 27-29)

The mentioned German "girocard" scheme is anchored in the banking infrastructure and reuses CSMs that are also utilized for direct debit transactions. Well-known schemes that mainly base on payment cards are operated by international credit card organizations, like Visa and MasterCard, who operate their own CSMs, which are outside the banking infrastructure, but linked to the account keeping banks (Evans & Schmalensee, 2005, pp. 10­11). Internet schemes like PayPal and Clickandbuy even combine multiple scheme layers, by providing consumers with a virtual account within their eco-system that can be used as payment instrument in e-commerce transactions (Maurer, 2015, p. 63). In order to top-up or balance the virtual account, consumers can make use of the bank-based methods credit transfer and direct debit, or connect the virtual account to a credit card and thereby integrate another scheme in theirs (Rodenkirchen & Kruger, 2011, p. 15). Figure 5 illustrates a scheme payment as described above.

Abbildung in dieser Leseprobe nicht enthalten

Figure 5. Scheme based payment process (own illustration)

2.1.4. Payment culture in Germany

Looking at the German payment culture, which is frequently analysed by the Bank of International Settlement in the "Red Book" and the European Central Bank in the "Blue Book", allows the conclusion that Germany is a giro country in contrast to cheque or cards countries (Dimitriadis, 2014, p. 22; Harasim, 2016, p. 34). This means that so-called giro payment methods like credit transfer and direct debit are the predominant electronic payment methods in the German payment market in contrast to other markets, where cheques or payment cards are predominantly used. (CPSS, 2012, p. 173; Bohle, 2002, p. 45; European Central Bank, 2007, p. 110)

In Germany, an observation of retail payments statistics resulting from regular central bank surveys shows that the share of cash payments is remaining very high, above European average (Harasim, 2016, p. 39). There are numerous observations on payment that produce statistics on different segments of the German payment market, e.g. analysing B2C payments at the POS (Godschalk, 2006, pp. 35-38; EHI Retail Institut, 2016). This work consciously refers to the central bank statistics, as the application of Instant Payments is not limited to a particular segment as to date. Table 1 gives an exemplary overview of the share of the three presented basic payment methods as well as cash payments in the German market in 2014. The data was originally further detailed, but aggregated for the below illustration in order to match the payment methods introduced. The category "Scheme payments" comprises debit, prepaid, credit and retailer card payments. The category "Other" was used in the referenced research to describe non-cash payments that could not be assigned to any other of the categories or where the payment instrument is unknown.

Abbildung in dieser Leseprobe nicht enthalten

Table 1: Market share of payment methods in Germany (Deutsche Bundesbank, 2015a)

It can be stated that German consumers are very affine to cash payments, but do use electronic payment methods, which are mainly giro methods. The reason for this categorization is that the scheme payment share comprises the German debit scheme "electronic cash", which is accessible for consumers, by using their so-called "girocard". The "girocard" is a German debit card that allows transactions in the electronic cash system, which is directly attached to the current account and operated by the Germany banking industry (European Central Bank, 2007, p. 112). The scheme is therefore categorized as giro method for observation of the payment culture in Germany, not as card payment scheme.

2.2. Instant payments as a new method of electronic payments

The European regulator of payments, the European Central Bank (ECB) is reacting to the digitalization of economies and the anticipation that in this turn the speed of interaction and communication will significantly increase (EBA CLEARING, 2015b, pp. 5-6). The assumption is that consumers who are more and more getting used to the experience of instant messaging and same day deliveries will not be willing to accept payment execution which is delayed in time (Leinonen, 2008b, p. 141; Lupu, Mual, & van Stiphout, 2016, p. 13; European Central

Bank, 2016b). The demand for a "cashless cash" solution is identified and referred to as "Instant Payments", assuming that consumers wish to find qualities of cash payments in the electronic, non-cash payment area (European Payments Council, 2016a, p. 8). This demand is expected to inevitably increase and therefore allegedly needs to be addressed by the payment market participants all over Europe (European Central Bank, 2014). A research project on choice and usage of payment instruments in Germany found no evidence that German consumers use electronic payment instruments, like credit cards as cash substitutes (von Kalckreuth, Schmidt, & Stix, 2009, p. 3), hence this assumption appears reasonable that an appropriate cash substitute is yet to materialize. The academic discourse on Instant Payments is yet to emerge to the recent nature of the subject, hence this chapter will give an overview of the professional discourse in the payment industry.

Instant Payments are conceptualized to merge the advantages of cash with the advantages of electronic payments for the consumers' benefit. In November 2014 the ECB published the basic rationale and requirements for an Instant Payments solution. According to this, the ECB concluded that a Pan-European solution for Instant Payments was required to consistently follow the European principle of integrated markets and avoid fragmentation accordingly (European Central Bank, 2014). In this approach, the ECB follows the overall European concept of harmonizing and simplifying cross-national interactions in the European Union (European Central Bank, 2016b). The Euro Retail Payments Board (ERPB), which was founded in 2013 as successor of the former SEPA Council and chaired by the ECB, is an entity that combines the supply and the demand side of the European payment industry and was therefore identified as appropriate driver of the ECB's Instant Payments initiative (European Central Bank, 2016a). The demand side was considered as addressee of the concept by positioning the concept of Instant Payments as reaction to their expected demand. So, the supply side of the market, which is represented in the ERPB, was asked to propose a solution. Therefore, the European Payments Council (EPC), an entity that is representing the interests of European payment service providers, was invited by the ERPB in its annual report 2014­2015 to set up a task force to propose a solution for a Pan-European Instant Payments scheme (Euro Retail Payments Board, 2015). In parallel, another organization took actions in developing an Instant Payments scheme. EBA CLEARING provides Pan-European payment processing infrastructure, it for example operates the large-value payment system EURO1 (see chapter 2.3.2.2) and is owned by more than 60 of the major European banks (Lichter & Egner, 2012, p. 63). EBA CLEARING also took up ERPB's proclamation for at least one Pan/European Instant Payments solution. The result of this initiative is a blue print on an instant payments solution, which was published in 2015. (EBA CLEARING, 2015a)

2.2.1. What has been defined in the Euro-area to date?

The ECB defines Instant Payments as follows:

"Instant payments" are [...] defined as electronic retail payment solutions available 24/7/365 and resulting in the immediate or close to immediate interbank clearing of the transaction and crediting of the payee's account (within seconds of payment initiation), irrespective of the underlying payment instrument used (credit transfer, direct debit or payment card) and of the underlying clearing and settlement arrangements that make this possible." (European Central Bank, 2014)

It shall be pointed out that this definition explicitly states that the underlying payment instrument was not pre/set by the ECB. In the following the proposals of the EPC as well as EBA CLEARING will be presented.

2.2.1.1. SCTnst scheme

Following the ERPB's invitation the EPC chose an underlying payment instrument and produced a proposal that meets the ECB definition and bases on the SCT standards. The so/ called SCTInst scheme is hence supposed to be directly effective on the current account and was first presented in November 2015 (European Payments Council, 2015). The proposal describes the suggested SCTInst scheme, which reuses the SCT scheme and extends it with necessary additions to address the requirements newly formulated by the ECB for Instant Payments. The EPC drafted a rulebook for the SCTInst scheme that was issued in April 2016 for public consultation (European Payments Council, 2016b).

The most important deviations from the SCT standards on transaction level - besides the immediate availability of funds - are in regards to messaging (European Payments Council, 2015, p. 5). The core element of the SCTInst scheme is the messaging between the originator and the beneficiary each via their banks participating in the SCTInst scheme. The messaging is illustrated with blue arrows in the below figure and provides that information on the Instant Payment transaction is exchanged between the parties in the messages 1/3, 4b/c, 5a. The messaging shall be completed in 10 seconds including different validation and verification checks on both sides. Orange arrows illustrate funds flow whereas making funds available on the beneficiary current account is step 4a. This making the transferred funds available immediately after successful validation of the order is obviously the major action in the consumer perception. The SCTInst scheme draft requires the originator bank to add a time stamp to the SCTInst payment order (step 2) indicating the expected execution time to the beneficiary bank. 10 seconds after that timestamp the originator bank needs to have received either a positive or a negative confirmation message on the transaction back from the beneficiary bank. For cases where no confirmation is sent, time/out is defined after 20 seconds. (European Payments Council, 2016a)

Figure 6 illustrates the proposed flow of a SCTInst transaction:

Abbildung in dieser Leseprobe nicht enthalten

Figure 6. SCTInst overview (own illustration adapted from (European Payments Council, 2016a, p. 9))

Clearing/ and settlement mechanisms (CSMs) are not included in the SCTInst scheme and therefore not explicitly defined in the EPC's proposal. As previously stated, the German retail payment/processing infrastructure is mostly collecting retail payment orders and processing them in batches at a dedicated cut/off time. This is in contrast to the suggested SCTInst scheme, where all transactions would have to be processed online at any time. Fitness for the purpose of Instant Payments is hence doubted in terms of the performance requirement for the existing CSMs (Korschinowski, Zylka, & Schwittay, 2015, p. 3). The European Central bank as regulator for Instant Payments is well aware of this gap in the concept and addressed it by founding a working group for Instant Payments to work on the CSM aspects in parallel to the EPC^[17]. Go Live of Instant Payments according to the SCTInst scheme is nevertheless envisaged for November 2017. Participation is - in contrast to the other SEPA schemes - still optional in a first step. (European Payments Council, 2015)

Additionally, the SCTInst scheme is proposed to have a maximum amount threshold, which is currently proposed to be €15,000 per transaction (European Payments Council, 2016a, p. 15; European Payments Council, 2016c, p. 1).

2.2.1.2. EBA CLEARING Blueprint

Like the EPC, EBA CLEARING operates on Pan/European level and is developer, maintainer and operator of electronic payment systems supervised by the European central bank (Lichter & Egner, 2012, p. 63). EBA CLEARING set up a task force of experts in payment services that delivered a blueprint suggesting "[...] (a) suitable solution(s) and is to serve as a planning framework for the implementation of infrastructure services [...]" (EBA CLEARING, 2015b, p. 5). It is made explicit reference to the SCTInst scheme proposal, with which the EBA CLEARING framework intends to be compatible. In particular the blueprint is intending to provide a framework for the clearing and settlement component, which is not addressed by the SCTInst scheme proposal and completely disregards the scheme component, hence addresses the gap left by the SCTInst scheme proposal. But EBA CLEARING does not raise the claim to propose the only European infrastructure solution. It is moreover stated that EBA CLEARING expects different European infrastructures to co/exist, but ensure the objective of integrated markets by interoperability. (EBA CLEARING, 2015b, p. 8)

In contrast to the SCTInst scheme proposal the EBA CLEARING blueprint refers to a maximum processing time of less than 5 seconds for the inter PSP transaction processing in order to address the expectation that consumers should experience a maximum of 10 seconds transaction processing time (EBA CLEARING, 2015b, p. 10).

2.2.2. Non-EUR example: Faster Payments

In a number of non/EUR countries, payments systems have already been established that address the concept of Instant Payments. This chapter briefly introduces an according system in the United Kingdom by presenting the functional concept, contributors and the coverage. Comparable systems are available in Denmark, Poland and Sweden, but follow similar principles and will therefore not be further detailed.

In the United Kingdom one of the most prominent European examples of instant or nearly instant payments has been introduced in 2008 with the launch of the Faster Payments Service (Faster Payments Scheme Ltd, 2015). Following the rationale of giving consumers easy and convenient access to banking services, while likewise centralizing the processing environment and being able to better deal with fraud risks arising from digitalization, Faster Payments Service (FPS) has been successfully established as a bank based payment system since then. FPS provides payments in real-time or near-real-time 24/7 for standing orders and electronic retail payments in the UK. In this context, the term 'electronic retail payments' mainly covers the area of Internet and telephone payments. (Ross, 2016, p. 100; Khiaonarong, 2014)

Consumers are able to access FPS via their usual banking channels and may thereby instruct their bank to instantly transfer a specific amount via the FPS system. The originator's bank is performing validity, security and funds checks according to their respective policy on receipt of the order. In the case of positive checks, the order is sent to the bank of the beneficiary, which checks the order details and confirms the acceptance or rejection of the transaction. Communication between the originator and beneficiary bank is processed through the FPS system. Once the acceptance of a transaction has been confirmed the originator will see the debit in his online banking, the beneficiary will see the respective credit and be able to dispose of the amount sent via FPS. Confirmation time and availability of the funds is usually real-time between FPS participants, but may take longer if one of the banks is not participating in the FPS system. Due to this potential time offset, the scheme has to also provide for near-real-time payments, as stated above (Faster Payments Scheme Ltd, 2016a). The FPS system is, nevertheless, very substantially matching the definition of Instant Payments.

FPS is centrally operated by the non-profit membership organisation Faster Payments Scheme Limited and considered a systemically important payment system, which is therefore overseen by the Bank of England (Bank of England, 2012, p. 3). Currently, 10 major English banks participate in the FPS (Faster Payment Scheme Ltd, 2016b). The FPS system covers the UK payment market for consumer and business payments in Pound Sterling and is therefore limited to one European country. Each participating bank may define individual transaction limits for consumer and business payments within the scheme (Faster Payment Scheme, 2016c).

2.3. The market for electronic payments in Germany

As the framework has been defined and an example for successful implementation of an Instant Payments solution have been given, the subsequent chapters will analyse the German payment market with focus on the attractiveness of Instant Payments for Germany. The market analysis shall acquire the position of a payment service provider (PSP) who considers offering an Instant Payments solution to merchants. Attractiveness shall be defined as a set of market characteristics enabling a PSP to develop an advantage in comparison to the competition. A competitive advantage ensures the PSPs potential to make profit in the respective market and could be the key criterion for a strategic decision for or against doing Instant Payments business in the German market. (Porter M. , 1980, pp. 3/4)

As the concept of Instant Payments is yet to enter the German market in form of a concrete solution, the market analysis will follow the ERPB's rationale for the SCTInst definition and make the assumption that Instant Payments will compete in the market segment where bank/based push/payment methods are currently established. Referring to the cube illustration previously used for the German payment market this segment is highlighted in green in figure 7.

Abbildung in dieser Leseprobe nicht enthalten

Figure 7. Market segment considered (own illustration)

2.3.1. Market characteristics

This chapter will analyse the market characteristics of the payment market in Germany that are influencing the attractiveness of Instant Payments for this market. For this purpose, the concept of Michael E. Porter that names five forces manifesting a market's competitiveness will be adopted for a payment service provider, who is developing an Instant Payments strategy for Germany. Porter names supplier power, buyer power, threat of new entrants and threat of substitution as influences for the market's overall competitiveness (Porter, 1979). These influences are used as reference for a structured and holistic analysis of the attractiveness of Instant Payments. An issue tree was developed to systematically prove or disprove hypotheses for the attractiveness of Instant Payments on the basis of Porter's five forces. The issue tree's structure was woven in the below market analysis, but a graphic illustrating the structure can be found in Annex 4.

Based on Porter's five forces suppliers will be observed as a first step. Competitive rivalry shall be examined in the same course. Afterwards special attention will be paid to the forces of buyers, whereas buyers are twofold in this context and consist of the group of payment acceptors or merchants, as well as payers, which comprises consumers and businesses which comprises consumers and businesses. Potential substitutes will be considered in the next step. The following analysis of market entry barriers is closely related to the externalities that affect the PSPs approach to Instant Payments. Hence, this fifth market force identified by Porter will lead over to the examination of external influences as defined in the PESTEL approach. PESTEL analysis is a commonly used approach to structure the analysis of macro/environmental influences on a specific market while it is an acronym for the areas it covers. Political, environmental, social, technological, economic and legal influences are part of a PESTEL analysis and apart from environmental influences, all areas will be considered and analysed in this context. Special focus will be on the political, legal and technological influences, which appear particularly important in the highly regulated payment industry (Hartmann D. M., 2006, p. 8). As payment services are not physical their environmental effect is less important and this aspect will be omitted. (Kotler, Keller, Brady, Goodman, & Hansen, 2009, pp. 154/172)

2.3.1.1. Supplier Power

As described in chapter 2.2.1 the basic payment method credit transfer is bank/based, and does ultimately refer to the current account. The banks are perceived as central units in the payment industry as they hold the consumer current accounts, to which each payment will be eventually referred (Ehrhardt, 2002, pp. 93/94; Kruger & Seitz, 2014, p. 71). Hence, the largest supplier group of payments in Germany is the banks. Banks hold two roles in the context of electronic payment processing (Riedl, 2002, pp. 29/30), which needs to be further detailed in order to analyze the interdependencies on the supply side of payment services.

1. Firstly, banks offer payment services to consumers and businesses directly and are therefore competing with other banks and PSPs.
2. Secondly, they act as suppliers for secure payment processing and thereby support non/bank parties like PSPs in having access to their systems for this purpose. In this role the banks compete with other banks.

In both roles, the banks are competing for customer relationships, but for two different customer groups. When issuing payment instruments the customers are consumers and businesses. In this role, banks do have an excellent position in terms of access to market, as the number of giro accounts kept at private or savings banks in Germany was about 101.9 million in 2014 (Deutsche Bundesbank, 2015b, p. 4). In Germany 99% of the citizen hold an account that can be used for payment (Harasim, 2016, p. 45). When enabling customers to accept payments or acquire payment instruments, the banks' customers are very often businesses and the banks are suppliers for the businesses' operations. In the case the business is a payment service provider, the bank supplies elements of the core products, which ultimately base on banking services (Evans & Schmalensee, 2005, pp. 258/259). Payment service providers can use the banking services directly in their business role or require payment processing as part of a financial services product, like for example a payment scheme. The banks' position in this supplier role is generally strong, as all the roughly 1,900 payment service providers in Germany require banking services (Deutsche Bundesbank, 2015b, p. 5).

One may assume this strong supplier role gives banks an excellent position to drive prices up. However, despite their strong fundamental role in both contexts the banks in Europe, hence also the German banks have experienced significant competition increase in the past years due to different reasons. This competition increase is affecting the supplier position of the banks, but is relevant for PSPs as well, in the direct competitor relationship. The creation of the European Monetary Union (EMU) was the foundation for the euro and opened the European markets for foreign banks, which were now able to easier address German bank's customers with alternative offers (Walmsley, 2000, pp. 96/98). The introduction of a Pan/European currency in 1999 had the clear aim to reduce intra/European currency risks and make cross/border business significantly easier for all European stakeholders including banks and "[make] the euro area an attractive region for third countries to do business" (European Commission, 2015; Hale, 2008, p. 119). This was further fostered by the implementation of the SEPA standards for payment transactions as a logic continuation of the European market consolidation and integration and will be further detailed in chapter 2.3.2.1 (Skinner, 2008, p. 1). For banks that were still struggling with the aftereffects of the global financial crisis the SEPA implementation was a significant burden (Dimitriadis, 2014, p. 85; ibi research, 2013, p. 126). The European banking industry moved closer together in consequence of these changes and the competition for banking customer relationships for the German banks exacerbated significantly. On the cost side, the first SEPA migration was an ^[18] The Euro was introduced as currency for deposit money or electronically stored units of value in 1999, while the Euro cash money in form of banknotes and coins was introduced in Germany in 2002 (European Central Bank, 2016c; CPSS, 2012, p. 172).

enormous burden for the banks but is bringing savings for the banks in the day-to-day payment processing as well, now that the SEPA payment methods are implemented (Schmiedel, 2008, p. 58).

Digitalization is an associated trend that is increasing competition and weakening the banks' supplier position (Skinner, 2015, pp. 20-21). Banking products are per see non-tangible and can easily be virtualized. They mostly base on exchange of information, which is per se the core function of the Internet (Welteke, 2002, p. 5). The digitalization development has been challenging for banks and financial service providers ever since the advance of the Internet and have manifested in the reduction of the bank branch infrastructure and the increase of direct banks already (Skinner, 2015, p. 56). Focus has shifted from providing purely basic banking services to providing new, value added services over the past years (Ehrhardt, 2002, p. 79). Payments are never of interest as a separate process, but embedded in larger business processes. As business processes are digitalized, the payment aspect has to follow this development (SRC, 2016, p. 18). In this context of innovation and entering new markets like the e-commerce, the banks are sought to not have the vigour despite their strong footprint in the market and widespread customer relationships. Their market penetration in the account keeping should enable them to make use of this position, but limited interconnection of the related data pools is hindering in comparison to other industries that embrace digitalization to generate new business (Skinner, 2015, pp. 33-34).

Additionally, most consumers perceive payment transactions in Germany as commodity (Judt, 2006, p. 29), which is in strong contrast to the high effort banks must make to establish and maintain the technological infrastructure to process payments (Bank for International Settlements, 2001, pp. 37-41). Whilst bank suppliers are mostly making competition by price, margins are continuously decreasing (Danese, 2008, p. 159). The consumer perception and their expectation to have payment services at their disposal for free leads to PSPs being less willing to pay higher prices to their bank suppliers as well (Skinner, 2015, pp. 204-205). One could expect that the dependency on the banking infrastructure gives the banks a very strong price boosting position as suppliers. However, the payment market regulates itself differently and banks are forced to follow the downward trend in pricing (Huch, 2013, pp. 8-11).

For banks, payment transactions are basic banking functions, which cannot be ceased for regulatory reasons and therefore decreasing profitability is less a threat for market exit, but still a serious economic risk in the presented context (Riedl, 2002, p. 379). Hence, the banks as suppliers are forced to foster larger volumes in order to profit from economies of scale and operate their technical infrastructure cost covering (Ernst & Augustin, 2012, p. 272). Two ways can be observed in the banking sector to deal with this, either to position the bank to become a Pan-European payments processor and aggregate numerous transaction on the own technical platform, or to outsource this processing and concentrate on other value-added banking services, that are not perceived as commodity by consumers (Riedl, 2002, pp. 379- 380). For all banks that cannot obtain one of these two strategies, it is likely to be acquired by larger banks that have a clear positioning in the European market (Skinner, 2008, pp. 2-3).

This consolidation trend was predictable (Doyle, 2008, pp. 192-193) and can be observed in Germany by comparing the number of registered credit institutions in 2004 with the 2016 figures. Whilst in 2004 the German regulating authority "Bundesaufsicht fur Finanzdienstleistungen" (BaFin) recorded 2295 credit institutions, only twelve years later this number has significantly decreased to 1758. Also the subgroup of commercial banks has decreased from 397 in 2004 to 270 in 2016, as well as the group of savings, co-operative and rural banks from 1900 in 2004 to 1442 in 2016. In the same timeframe, the number of foreign banks reporting to the German regulators has increased from 121 in 2004 to 139 in 2016. Figure 8 is illustrating this development.

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Figure 8. Number of banks in Germany (own illustration adapted from (BaFin, 2016c; Deutsche Bundesbank, 2016))

Another trend can be observed when comparing the number of overall registered credit institutions with the sum of all registered banks. Whilst in 2004 there have only been 2 non­bank credit institutions, in 2016 the delta has increased to 46. This can be interpreted by also

[...]

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¹ This assumption is valid for standard payments. Express payments are possible today and processed as fast as possible, still they are usually subject to specific cut/off times as well as higher cost. (Riedl, 2002, p. 212)

² Large/value payment systems are not in focus of this assessment

³ Potential paper/based payment systems that are still existing in Germany are not considered in this work, as the economically important systems are electronic.

⁴ Details on technical influences will be given in chapter 2.3.2.2

⁵ §1 ZAG, Rdn. 179

⁶ Payment Services Directive [DIRECTIVE 2007/64/EC] (16)

⁷ For e/commerce payments two additional basic or “meta” payment methods are mentioned. Direct carrier billing adds e/com payments to a consumer’s mobile monthly bill or takes funds from the prepaid credit. This ultimately refers to the four stated basic payment methods and is hence disregarded as separate category. Crypto/currencies are indeed a basically different payment method, but is in comparatively early stages of development and cannot be considered in the framework of this work. (Lupu, Mual, & van Stiphout, 2016, pp. 29/31)

⁸ Some publications additionally include public institutions as potential party of a payment. This differentiation is not considered in this work. (Harasim, 2016, p. 29)

⁹ The agreement for account management is referred to as „Girovertrag“ in Germany

¹⁰ Payment Services Directive [DIRECTIVE 2007/64/EC] (43)

¹¹ Differentiation between the different mandate types according to the SEPA Direct Debit Scheme Rulebook by the EPC shall not be detailed at this point, but can be consulted on www.europeanpaymentscouncil.eu. Additionally Müller provides a good overview over the different mandate types (Müller, 2013).

¹² §1 ZAG, Rdn. 188

¹³ §1 ZAG, Rdn. 190

¹⁴ Payment Services Directive [DIRECTIVE 2007/64/EC] (43), (46)

¹⁵ Payment Services Directive [DIRECTIVE 2007/64/EC] (16)

¹⁶ Payment Services Directive [DIRECTIVE 2007/64/EC] (24)

¹⁷ The working group suggested to have experts evaluate TARGET2 settlement with liquidity deposit of all participating banks and settlement cycles every 2 hours instead in a meeting on May 2nd 2016. Refinement of this proposal is not published, hence, not further considered in this work.

¹⁸ The Euro was introduced as currency for deposit money or electronically stored units of value in 1999, while the Euro cash money in form of banknotes and coins was introduced in Germany in 2002 (European Central Bank, 2016c; CPSS, 2012, p. 172).